ORIE_3150_Homework__7_2009_draft_answers

ORIE_3150_Homework__7_2009_draft_answers - ORIE 3150...

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Homework #7 Due March 11, 2009 1. Eureka Corporation leased a surface etcher from Callahan Industries. Eureka agreed to pay $4,525.60 per quarter for 5 years to lease the machine. There was neither an ownership transfer nor a bargain purchase option. The useful life of the machine was 8 years, with a residual value of $9,000. The annual interest rate was 8%, and the fair market value of the machine was $74,000. The machine was delivered and the lease was signed on January 1, 2009. Depreciation was straight line, full-year, recorded quarterly. a. Show the journal entry or entries Eureka Corporation must make on March 31, 2009 related to the lease. 1. OT? No 2. BPO? No 3. >75% useful life? No 4. >90% FMV? Yes (100%, in fact). . 000 , 74 $ 02 . 0 02 . 0 1 1 60 . 525 , 4 20 It is a capital lease. The Lease Obligation is $74,000 at the start, the present value of lease payments. Interest expense = Lease Obligation × interest rate = 74,000 × 0.02 = $1,480 March 31, 2009 Interest Expense $1,480 Lease Obligation 3,045.60 Cash $4,425.60 Next, depreciate over the lease term, since there is no OT or BPO. March 31, 2009 Depreciation Expense $3,700 Accum. Depreciation $3,700 b. Show the journal entry or entries Callahan Industries must make on March 31, 2009 related to the lease. This is similar to the Garth Company example done in class
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ORIE_3150_Homework__7_2009_draft_answers - ORIE 3150...

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